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Top 10 capital allowances tips for accountants

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15th Aug 2013
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Accountants have the ability to identify where clients can claim capital allowances and avoid falling foul of new legislation and common pitfalls.

Following his recent ‘Don't miss capital allowances window’ article, STax founder Andrew Stanley outlines 10 top tips around the topic of capital allowances.

  1. At a very basic level you will always need the combination of qualifying expenditure and a qualifying activity. Before getting deep into the case law or legislation a quick sense check of the situation can save everyone a lot of wasted time and effort
  2. Capital allowances can only be claimed on items used within a business and whether or not some items are claimable depends on the nature of the business in question. For example a hotel could claim the cost of a chandelier because it adds to the reception’s aesthetic appeal, which in turn attracts guests. A shoe factory could not as it can probably make shoes just as well without an expensive chandelier.
  3. If your clients are engaging in renovation works or a new development it is preferable to look at the question of allowances at the time of the work, or even before if possible. It is much easier to speak with a contractor to clarify what an invoice covers at the time rather than 18 months down the road!
  4. If your clients own freehold commercial buildings in their own name sideways loss relief is available for capital allowance generated losses [with some limits, see PIM4220]. So even if a property portfolio is not currently profitable, quite possible in the current climate, allowance can still be used for the benefit of clients with other sources of income
  5. Remember that furnished holiday lets qualify for capital allowances (this is one of only a few situations where residential buildings do qualify for capital allowances)
  6. Capital allowances can be available on foreign property as well (as long as the owner is a UK taxpayer and the building would qualify if located in the UK)
  7. If your client is looking to sell a building it makes sense to address the question of capital allowances before going to market. Not only can an amount of the allowance be used against the profits of the business but the residual can be rolled into the sale particulars. This can make a property more attractive and potentially commands a higher sale price
  8. With the arrival of the new S187A & S187B [CAA 2001] inaction is no longer an option. Regardless of whether your clients are buying or selling the capital allowances question needs to be addressed to avoid a total disaster. This situation should be explained to your clients at an early stage so that capital allowances can form part of the transaction negotiations and avoid derailing a deal at the eleventh hour
  9. For the most part conveyancing solicitors will not advise on capital allowances. If your client is buying or selling a commercial building there is a good chance that their solicitors will try to shift their duty of care to advise on capital allowances on to you. As you will probably not have capital allowances in a property transaction covered in your engagement letter it is questionable whether this does actually shift the duty of care. Even so in this situation beware that your input may influence a situation where substantial amounts of tax benefit could be gained or lost. Make certain you know where you stand and if in doubt bring in outside expertise
  10. As accountants you operate in an ever increasing litigious arena. When accountants are being sued successfully for amounts as much as £1.4m, such as in the recent Mehjoo vs Harben Barker case, for not bringing in specialists at the right time, a full review of your clients' buildings may not only benefit them but also save your practice further down the line

Capital allowances in relation to real estate are a specialist area with many potential pitfalls.

With the principle rule of the new Finance Bill 2012 coming into force in April 2014, clients stand to potentially make or lose substantial sums.

If you are not 100% sure of the best course of action for your clients seeking third party specialist input is a must.

Andrew Stanley is the managing director of STax, a firm of tax advisers specialising in capital allowances and real estate related tax matters.

Replies (8)

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By plummy1
16th Aug 2013 00:02

Where does the liability lie?

Whilst in the past commercial conveyancing solicitors have been able to pass the issue over to accountants I'm not sure that this is going to be the case in the future and especially after the new rules kick in post April 2014. Even under the old capital allowances rules i.e. pre April 2012 I hear commercial conveyancing solicitors were occasionally having to settle out of court because they had not given proper advice in this area.

In Clarke v Iliffes Booth Bennet [2004] EWHC  1731 a case not directly concerned with capital allowances, it was held that a solicitor had a duty of care to understand a contract to the extent necessary to give proper advice to the client and could not avoid the issue of tax indemnities but was under a duty of care to understand them. (paraphrased from Steven Bone & Martin Wilson, Capital Allowances: Transactions & Planning).

What is not in doubt for me as is touched on in the article by Andrew Stanley is that although a capital allowances claim may not be appropriate for all commercial property expenditure an accountant would be well advised to speak to a trusted specialist in the majority of cases to establish if or when a capital allowances claim could be made. The earlier a capital allowances specialist can be involved in many projects the more they can add value both for the accountant or solicitor and their client.

John Plumridge

www.curtisplumstone.com

 

Thanks (2)
By Andrew Stanley
19th Aug 2013 17:05

Iliffes Booth Bennet

 

Thanks John for reaffirming the key message and mentioning the Iliffes Booth Bennet case, I should have put it in the article!

What sort of reaction have you found from conveyancing solicitors when you have brought the case up? From our experience there is a lot of initial confidence that care letters excluding all tax advice are a panacea for liabilities of this type.

Obviously it would be better all round if clients are advise effectively on this matter and the care letter isn't put to the test!

Andrew Stanley

www.staxuk.com 

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Replying to omnivarma:
By plummy1
20th Aug 2013 00:02

Solicitors

Andrew

Yes we find the same thing. Solicitors have always relied on their ability to exclude any liability for tax advice and as far as I can see the new rules (because they are set in statute) remove their ability to do this. I think any court would find in favour of a property owner because who is best placed to understand the law in this instance? I think there has also been enough opportunity for solicitors to educate themselves on the matter. However we will just have to wait and see how this plays out in reality. Do you think companies will appear who encourage property owners to make a claim against their solicitor if they  have not been given proper advice at the time of purchase?

John

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By Andrew Stanley
21st Aug 2013 12:05

John,

If enough taxpayers miss out due to gaps in advice from their solicitors I think it will inevitable.

Andrew

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By grahamw11
30th Aug 2013 22:15

wholly, exclusively and necessarily

I am intrigued by point number 2.

 

If a shoe manufacturing company were silly enough to hang a chandelier in the factory (in place of some of the strip lighting), why should it not claim Capital Allowances on said chandelier?

 

The item appears to be plant used in the business (for the purposes of the business) and, assuming there are no director/shareholder personal reasons for the acquisition of the chandelier, I see no reason not to claim Capital Allowances.

 

Have I missed something?

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Replying to Briar:
By Andrew Stanley
06th Sep 2013 16:00

Hi Graham,

Its a good question as logically you would think that the company has incurred the expenditure and it performs a function in the business i.e. provision of light.

Whilst there is nothing in the capital allowances act to preclude  a claim on a chandelier in a factory, I am personally sure that HMRC would seek to disallow it as providing more than its basic lighting function (this may depend on the magnitude of the expenditure in question).

In CIR v Scottish & Newcastle Breweries Ltd [HL 1982, 55 TC 252; [1982] STC 821] HMRC sought to disallow allowances on many interior items, including lighting. The commissioners held that the the provision of 'atmosphere' was part of the companies trade in light of the sector it operated in i.e. the running public houses and hotels. This decision was then appealed by HMRC but subsequently upheld by the House of Lords.

More recently Wimpy International Ltd. and Wimpy and Associated restaurants Ltd v Warland [CA 1988, 61 TC 51] reinforced this position, but only on appeal to the high court did lighting became allowable.

Since both these ruling we have had the changes in 2008 to bring general light into the new integral features classification and I know of no case law preventing a factory from claiming a chandelier. However I would expect HMRC to disallow this leaving the taxpayer to appeal the decision through the tax tribunal (and probably further with HMRC's current combative stance).

I am not sure you could win the same argument around function as in the Scottish and Newcastle or Wimpy cases, for a shoe factory but maybe it should be put to the test!

I hope this has answered your question.

Please don't hesitate to come back to me if not.

Andrew Stanley

www.staxuk.com 

 

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By Andrew Stanley
09th Sep 2013 11:22

Hi Graham,

I dug this extract out of the revenue's guidance. I thought it might shed some further light on your question and how HMRC may look to disallow a claim on a chandelier in a  factory (key point in bold).

>>>>>>Extract begins>>>>>>

 

In his judgement Hoffman, J said that there were three tests, all of which can be called functional, to be considered in deciding whether an item was plant. These tests are:

Is the item stock in trade?I the item the business premises or part of the business premises (the premises test)?Is the item used for carrying on the business (the business use test)?

The business use test is basically the same as the functional test CA21100.

The fact that an item passes the business use test is not enough to make it plant. If the business use is as stock in trade - that is if the answer to (1) above is yes, the item is not plant. Furthermore, it is not sufficient that the asset is used in the business, it must be employed in carrying on the business. For instance, general lighting failed this test in the Lyons case CA21110 and in Hunt v Henry Quick Ltd (TCL3328), whereas lighting to create atmosphere and to attract customers was allowed in Wimpy.

>>>>>>Extract ends>>>>>>

Regards,

 

Andrew

www.staxuk.com

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By Saqib
03rd Sep 2014 14:36

capital allowances claiming Backdated

Dear All

Would some one please advise me re claiming capital allowance for previous years.

Recently a potential client approached me. HMRC wants to check her documents re her tax return. The return filed by previous accountant is incorrect as numbers make no sense, no bank reconciled, hence no supporting. So I have to amend and submit a revised return.

She bought a car in 2009, no capital allowance or HP payments were claimed .

In short can she claim the allowance for 3 previous years( 2009/10, 2010/11 2011/12) on 2012/13 return. 

Many Thanks

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